MAHESH GORDHANDAS GARODIA,MUMBAI vs. DCIT 22(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM ITA No.5098/Mum/2015 (Assessment Year :2010-11) Shri Maheshkumar Gordhandas Vs. Dy. Commissioner of Garodia, Income Tax 22(1) 149/156, Garodia Shopping Centre, Mumbai Garodia Nagar, Ghatkopar (E) Mumbai – 400 077 PAN/GIR No.AACPG2906R Appellant) .. Respondent) ITA No. 5146/Mum/2015 (Assessment Year :2010-11) The Asst. Commissioner of Vs. Shri Mahesh S Garodia, Income Tax 27(2) 149/156, Garodia Shopping Mumbai Centre, Garodia Nagar, Ghatkopar (E) Mumbai – 400 077 PAN/GIR No.AACPG2906R Appellant) .. Respondent) Assessee by Dr. K. Shivaram & Shri Rahul Hakani Revenue by Shri Purushottam Tripuri Date of Hearing 10/07/2018 Date of Pronouncement 12/07/2018 आदेश / O R D E R PER R.C.SHARMA (A.M):

These are cross appeals filed by assessee and Revenue against the order of CIT(A)-25, Mumbai dated 03/08/2015 for A.Y.2010-11 in the matter of order passed u/s.143(3) of the IT Act.

2 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas 2. The following grounds have been taken by the assessee in ITA No.5098/Mum/2015:- 1) The learned CIT(A) erred in confirming order of the Assessing officer taxing Rs.50 crores being part sale consideration which would be received by the assessee only if the area pertaining to the said consideration is released from the CRZ zone without appreciating that the said Rs. 50 crores is neither due / accrued during the year nor the same is received during the year and hence the addition of Rs. 50 crores may be deleted. 1.1) Without prejudice to above, if the part sale consideration of Rs. 50 crores is taxed in this year then brokerage charges of Rs. 1 crores may be allowed as a deduction. 2) The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal.

3 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas 5) The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.

4 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas purposes and further in view of the agreement with the buyer, the sellers were not entitled to receive an amount of Rs.50 crores. The said amount of Rs.50 crores would be paid only on the happening of an event in future. AO did not agree with the assessee’s contention and added Rs.50 Crores which was not realized. The AO also disallowed brokerage of Rs.1 Crore. 6. By the impugned order CIT(A) upheld the addition of Rs.50 Crores, but held that reference to DVO was not justified, against which both assessee and revenue are in further appeal before us. 7. At the outset, learned AR placed on record the order of the Tribunal in the case of the co-owner, wherein similar addition made by the Tribunal was deleted and reference to DVO was held to be not justified following the decision of Bombay High Court in the case of Pooja Prints(supra). We had carefully gone through the order of the Tribunal in ITA No.5097/Mum/2015 for the A.Y.2010-11 order dated 01/11/2017, wherein similar addition made by the AO in the hands of other co-owner Goverdhandas Garodia deleted by the Tribunal after having the following observation:- 24. We have heard rival contentions and perused the material available on record. It is manifest from the assessment order that the Assessing Officer being of the view that cost of acquisition shown by the assessee on the basis of registered valuer’s report is more than FMV had made a reference to the DVO for determining the FMV of the capital asset transferred by the assessee. As held by the Hon'ble Jurisdictional High Court in Pooja Prints (supra), as per the existing provisions of section 55A(a), which was applicable to the relevant assessment year, a reference can be made to the DVO only if the value declared by the

5 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas assessee in the opinion of the Assessing Officer is less than its fair market value. In the facts of the present case, the situation is reverse. The Assessing Officer made a reference to the DVO under section 55A(a) having entertained an opinion that the value adopted by the assessee is more than the FMV. Respectfully following the decision of Hon'ble Jurisdictional High Court (supra), we uphold the order of the learned Commissioner (Appeals) on this issue. Grounds raised are dismissed.

6 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas

iv) Finally as per clause 2.3.4 of the sale deed, the balance sum of Rs. 50 crore is payable to lessees towards the areas which are covered by the CRZ notification, rules and regulations of Government of India and shall be payable upon the said area being permitted to be developed and/or utilised for the development purpose. 15. It further provided that the said consideration of Rs.50 crore shall be paid pro–rata to the areas released for development from CRZ regulation. Clause 2.3.5 further reiterate that the balance amount of Rs.50 crore shall be payable only if the area covered by the CRZ notification is permitted for development. Further, clause 2.5 of the agreement provides that in case area of the property is less than 500 acres, the lessees shall be liable to return the consideration paid under the agreement on a pro–rata basis. Thus, a reading of clause 2.3.4 and 2.3.5 of the agreement makes it clear that the payment of final tranch of Rs. 50 crore is contingent upon release of part of land covered under CRZ regulation for development work. There is no dispute to the fact that till date a portion of the land is still covered under the CRZ regulation and no permission has been granted for development work relating to the said part of the land. Therefore, as per the terms and conditions of the sale deed, the assessee has not received amount of Rs. 50 crore. In view of the specific restriction imposed under clause 2.3.4 of the sale agreement, the Departmental Authorities cannot read the clause specifying the total sale consideration payable to the assessee under clause 2.1 in isolation. In our considered view,, the sale agreement has to be read as a whole to find out the real intention of the parties with regard to sale of land as well as consideration payable for such sale. When there is a specific clause in the agreement imposing condition for payment of Rs. 50 crore, on happening of certain events, unless such condition is fulfilled and restriction has been removed, it cannot be said that the assessee is liable to be assessed for the entire sale consideration mentioned in clause 2.1 of the agreement irrespective of the fact whether the assessee has actually received Rs. 50 crore or not. It is well settled principle of law that assessment has to be made on the basis of real income received by the assessee. In the facts of the present case, it is an admitted factual position that the assessee has not received the amount of Rs.50 crore. There is also no certainty that the assessee would at all may receive the amount of Rs. 50 crore even in future. Therefore, the assessee cannot be subjected to capital gain on the amount of Rs. 50 crore, though, it may be a part of the total sale consideration mentioned in the agreement, considering the fact that the assessee was supposed to receive the said amount on fulfillment of certain conditions and as per the facts on record, the assessee has not received the said amount, since, the conditions have not been fulfilled.

7 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas 16. The observations of the Departmental Authorities that capital gain has to be computed on the total sale consideration, whether or not the assessee has received the amount of Rs. 50 crore, in our view, is legally untenable. In this context, we may refer to the relevant statutory provisions governing the issue. At first, we shall refer to section 45 of the Act which reads as under:– “Capital gains. 45. [(1)] Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections [***] [54, 54B, [***] [54D, [54E, [54EA, 54EB,] 54F [54G and 54H]]]]], be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.” 17. A plain reading of section 45 of the Act would suggest that any profit or gain arising from transfer of a capital asset shall be deemed to be the income of the assessee of the relevant previous year, wherein, such transfer takes place. Thus, as per this provision, taxability of capital gain would depend upon arising of profit from transfer of a capital asset. Section 48 of the Act which provides the mode of computation of capital gain says that income chargeable under the head capital gain shall be computed by reducing certain amounts from full value of the consideration received or accruing as a result of transfer of the capital asset. The expression “full value of consideration received or accruing” would mean the amount actually received by the assessee or consideration which has accrued to the assessee. The expression “accrue” means a right acquired by the assessee to receive income. Unless, a debt due by somebody has been created in favour of assessee, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. An amount can accrue to assessee if he acquires a legally enforceable right to receive it from the debtor. Keeping in perspective the aforesaid statutory provisions, if we examine the facts of the present case, it cannot be said that assessee has either derived the profit or gain amounting to Rs. 50 crore during the relevant previous year in terms of section 45(1) of the Act, nor it can be said that the amount of Rs. 50 crore would form part of full value of the consideration received or accruing as a result of transfer of the capital asset. At the cost of repetition, we must observe that the amount of Rs. 50 crore was payable to the assessee subject to fulfillment of certain conditions as enumerated in the sale deed. It is patent and obvious, the conditions as mentioned in clause 3.4 of the sale deed have not been fulfilled. Therefore, the assessee does not have any legally enforceable right under the agreement to receive the amount of Rs. 50 crore. In these circumstances, computation of capital gain on the amount of Rs. 50 crore, in our view, is not only improper but against the scheme of the Act. The entire purpose of the Income Tax Act, 1961 is to assess the real income of the assessee. Therefore, the Departmental Authorities cannot assess any hypothetical or notional income to tax. Having held so, we feel it appropriate to refer to the

8 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas decision of the Hon'ble Jurisdictional High Court in Mrs. Hemal Raju Shette (supra). The facts of the case are, by virtue of an agreement the assessee transferred its share holding in a particular company. As per the terms of agreement, initial consideration of Rs. 2.70 crore was to be received immediately and deferred consideration of Rs. 20 crore was to be received over a period of four years based on a formula. As per the working of the formula a situation may arise where no amount on account of deferred consideration could be receivable by the assessee. It so happened, the assessee could not receive part of the deferred consideration in assessment year 2006–07. However, the Assessing Officer held that, since, as per the terms of the agreement, assessee was to receive the deferred consideration in four assessment years, it is liable to pay capital gain tax. When the issue ultimately came up for consideration of the Hon'ble Jurisdictional High Court, the Hon'ble Court after relying upon a number of decision of the Hon'ble Supreme Court held as under:– “8. In the present case, from the reading of the above clauses of the agreement the deferred consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009- 10. Further the formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the respondent- assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration. The consideration of Rs.20 crores is not an assured consideration to be received by the Shete family. It is only the maximum that could be received. Therefore it is not a case where any consideration out of Rs.20 crores or part thereof (after reducing Rs.2.70 crores) has been received or has accrued to the respondent- assessee. As observed by the Apex Court in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. "The income can be said to accrue when it becomes due.... The moment the income accrues, the assessee gets vested right to claim that amount, even though not immediately." In fact the application of formula in the agreement dated 25th January, 2006 itself makes the amount which is receivable as deferred consideration contingent upon the profits of M/s.Unisol and not an ascertained amount. Thus in the subject assessment year no right to claim any particular amount gets vested in the hands of the respondent-assessee. Therefore, entire amount of Rs.20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the respondent-assessee. The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. In fact as observed by the Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 "It is clear therefore that income may accrue to an assesee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may

9 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro …. …. ….". In this case all the co-owners of the shares of M/s. Unisol have no right in the subject assessment year to receive Rs.20 crores but that is the maximum which could be received by them. This amount which could be received as deferred consideration is dependent/contingent upon certain uncertain events, therefore, it cannot be said to have accrued to the respondent-assessee. The Tribunal in the impugned order has correctly held that what has to be taxed is the amount received or accrued and not any notional or hypothetical income. As observed by the Apex Court in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize." In this case Rs.20 crores cap in the agreement is not income in the subject assessment year. It has been observed by the Apex Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 that one has to read capital gain provision along with computation provision and the starting point of the computation is "the full value of the consideration received or accruing". In this case the amount of Rs.20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated 25th January, 2006 pertaining to the transfer of shares.” 18. The ratio laid down by the Hon'ble Jurisdictional High Court, as aforesaid, squarely applies to the facts of the present case. In view of the aforesaid, we hold that the amount of Rs. 50 crore having neither been received by the assessee nor accrued in the financial year relevant to the assessment year under dispute, it cannot be considered as a part of sale consideration for computing capital gain in the impugned assessment year. The Assessing Officer is free to proceed in accordance with law if and when such income arises. With the aforesaid observation, ground no.3, is allowed.

10 ITA No.5098/Mum/2015 & 5146/Mum/2015 Shri Mahesh Kumar Gordhandas co-owner as stated above, we confirm the action of CIT(A) for deleting the addition of Rs.50 Crores. With regard to making reference to the DVO, the Tribunal have also decided that in terms of the decision of the Hon’ble Jurisdictional High Court in the case of Pooja Prints, wherein it was held that as per the existing provisions u/s. 55A(a) AO would make a reference to the DVO for determining the fair market value where he is of the opinion that value shown by the assessee is less than the fair market value. 10. In the result, appeal of the assessee is allowed whereas appeal of the Revenue is dismissed. Order pronounced in the open court on this 12/07/2018 Sd/- Sd/- (AMARJIT SINGH) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai Dated 12/07/2018 Karuna Sr.PS

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. सत्यापित प्रतत //True Copy// (Asstt. Registrar) ITAT, Mumbai